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Copyright: Toni Straka, 2005-2011 This blog is for information and entertainment purposes only. Under no circumstances does this information represent a recommendation to buy or sell securities or any other type of investment instruments.

Tuesday, April 27, 2010

The ongoing tussle in Germany's coalition how to justify and account for emergency funds for near-default Greece and the resulting delay in action has been harshly punished by speculators on Monday. Yield spreads and CDS prices reached new record highs not only in Greece, but in Portugal and Spain as well.
According to Marketwatch,

Ongoing worries about Greece's debt load and fears problems could spread to other indebted euro-zone countries drove up the cost of insuring Greek, Portuguese and Spanish government debt to record intra-day levels on Monday, according to CMA DataVision.

The spread on five-year Greek credit default swaps traded near 703 basis points after trading at more than 713 basis points in earlier action. That's up from around 615 basis points late Friday. That means it would cost $703,000 a year to insure $10 million of Greek debt against default for five years.

The Portuguese CDS spread rose to 305 basis points from around 279 basis points on Friday.

Mr. Market is definitely taking the currently biggest risks in the Eurozone to the cleaners. On Monday Greek 2-year yields pierced the 13%-mark after closing above 11% before the weekend, we learn from FTAlphaville.
Such radical moves may be only a taste of what is to come for the possible breaking point for the Euro - Spain - and a UK with a worse structural deficit than Greece, as Burning Our Money blog reminds investors that Britain looks still paler than the Hellenic Republic in terms of structural deficits.
Check out this earlier post that Spain's debts are 6 times those of Greece and British taxpayers will have to pay 10 times as much in public debt - on top of their mortgages.
Mind you, all these figures are meaningless when remembering the sudden explosion of actual capital needs in Greece and Ireland. I expect this initial official pattern of optimistic drip-feed turning into a market-controlled nightmare for investors to be repeated in the other weaker Eurozone countries in the not too distant future.
Originally waking up with the idea to blog about the - now void - question why profligate and cheating borrower countries still pay less interest than the average consumer who will only be granted a loan that s/he can pay back in her/his lifetime, I am kind of relieved that markets again turn out to be the best instrument for pricing risk in the absence of political action.
Back to the question why governments are seemingly treated differently: Despite piling up debt loads that will either burden 2 to 3 generations to come or will be inflated away, tearing big holes in investors pockets in the process, they still get away with paying much less interest than corporate and private borrowers.
Greece paying 13%? So what? Even high-score credit card holders without a default history get hit with rates more than that. Don't you agree?
Although irrational exuberance got buried in August 2007, timely blogged here, the world is still far away from rational risk pricing and asset valuation.
A strong dollar and high oil prices indicate that the accelerating trend in inflation, last at 1.4% in the Eurozone after 0.6% a year earlier mean that the ECB may not be able to avoid a rate hike much longer, a move most feared by politicians who have only little room left for fiscal stimuli.
Seeing an imbalance in rates caused by central banks caught in web of political lobbying there are more obvious imbalances.
How else can it be that a the world's most indebted nation, the USA; a de facto bankrupt UK, a spend-happy France, Austria, fatally threatened by a CEE banking disaster, and comparatively well-off Germany all carry an AAA rating?
I am confident Mr. Market will correct these imbalances too as all parties concerned have so far come up with no other recipe than to feed the debt disaster with more debt. With all Eurozone countries running budget deficits it is ridiculous to even think about structural improvements.
After all, where will Portugal dig out €780 million, its last known share in the Greek rescue package?
This applies to all Eurozone members. Germany will run a record budget deficit of €105 billion this year, so their help for Greece is not exactly coming out of rich aunt Angela's (Merkel, chancellor) purse.
We witness a merry shuffle-around of debts between debtors while accountants try to defer payments to a future where none of them can be held accountable anymore. Is this the last stage before the day of reckoning for the Eurozone?DISCLOSURE: Trailing stop on short EUR/USD triggered on Friday.

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EXCERPT FROM THE US CONSTITUTION, Article I, section 10: No State shall ... coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts....

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About Me

I am an INDEPENDENT Certified Financial Analyst who worked as a financial journalist for 15+ years and now evaluate global market trends. Analyzing financial and political news permanently I want to share my insight with those who understand that we are in an era of global redistribution of wealth. The US-European centric approach does not work anymore. 6 billion people in the developing countries now demand their fair share of the world's resources.
Having worked many years for a leading newswire I have learned to understand the fatal concept of ever expanding credit by heart. If you want to learn about the future of the economy, study history.